Out-Law News 3 min. read

Renegotiating contracts can help recover failing IT projects, says expert


IT projects that are drifting towards failure can be recovered if the parties are able to renegotiate their contractual arrangements, an expert has said.

IT law specialist Clare Murray of Pinsent Masons, the law firm behind Out-Law.com, said that there will be a "window of opportunity" for organisations to resolve issues with suppliers and prevent problems with the delivery of IT projects resulting in spiralling costs.

"To deliver a successful major IT project there needs to be an effective working relationship between the customer and the supplier, and a relationship of trust between the parties' senior representatives," Murray said. "Each party needs to believe that in the face of the inevitable challenges that the project will face, the parties can work together to overcome the challenges and deliver the project successfully."

"The future of the relationship and the project are in peril when the customer loses faith in the ability of its supplier to deliver. However, at that point the relationship and the project are not necessarily doomed to fail with delays and cost overruns and/or an expensive, disruptive and litigious termination. There is likely to be a window of opportunity to reset the relationship and realign the contract or at least to effect a consensual termination and exit," she said.

Murray said that customers and their suppliers must both be willing to accept faults for the failing of a project. She said that renegotiating contracts can provide parties with a chance to redefine their relationship and improve the chances of successfully achieving their project objectives, but admitted that the process is not always easy to undertake.

"There is always the possibility of parties avoiding problems by working effectively together to keep projects on track," Murray said. "The key is to spot the warning signs early and take action.  As matters deteriorate and the parties' relationship becomes strained, an amicable renegotiation is less likely.  "

"Tackling a distressed project is likely to involve organisations undertaking difficult discussions both internally with the project sponsor and externally with suppliers: it can often be difficult for both customers and suppliers to admit that a project is failing and that steps need to be taken to turn it around. The problems cannot be solved solely by suppliers. Both parties need to invest in the relationship if the project is to be a success," Murray added.

Murray said that organisations and their suppliers need to take legal advice on the merits of each of their positions and on the rights and remedies that are available to them. Organisations should define their objectives, formulate a clear strategy and tactics to achieve their objectives and of course, develop contingency plans in case they cannot obtain what they want in renegotiations, she said. "The renegotiated contract needs to support the objectives of the project. For example, the remedies available to the customer need to align with the objectives and drive the right supplier behaviour," Murray added.

The IT law specialist was commenting after a report by management consultancy firm McKinsey & Company revealed that 17% of IT projects undertaken lead to organisations' very existence coming under threat as a result of major budget overspends. These 'black swan' IT projects are cases where companies end up spending between 200 and 400% above what they had budgeted for at the outset.

The McKinsey report was based on research it conducted into 5,400 projects in collaboration with the University of Oxford.

It said that its survey of IT executives revealed that companies can maximise the chances of IT projects being delivered without delay and to cost by "focusing on managing strategy and stakeholders instead of exclusively concentrating on budget and scheduling; mastering technology and project content by securing critical internal and external talent; building effective teams by aligning their incentives with the overall goals of projects; excelling at core project-management practices, such as short delivery cycles and rigorous quality checks."

Murray said that organisations can improve their chances of IT projects succeeding by adhering to the points raised in the McKinsey research. Having robust procurement processes, a viable service model and strong governance internally as well as in supplier and third party relationships are also things customers should strive to implement from the outset, she said.

In addition customers should only agree contracts that reflect their requirements and there should be an "agreed solution" written into contracts that appropriately allocates risk and responsibility between customers and suppliers, Murray said. Having an "effective mechanism to manage change" and having a "skilled, well-resourced retained customer function to manage supplier performance" should also be things organisations should look to put in place from the outset of IT projects, she advised.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.